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Insightful Understanding of Taxability of Auto Accidents

Settlement of auto accidents is one of its own kind of hassle. However, receiving a call from the IRS for paying its share comes with more stress and hassle. Taxes are complex, and greatly depend on the situations or circumstances. Just like many other tax complications, the answer to your query about taxability of auto accidents is that ‘it depends on the situation’.

The total of your auto accident settlement is broken down into settlements for different kinds of injuries, including these.

Medical injuries

Car damage

Psychological injuries

Loss of the wages

Property damages

Punitive damages etc.

The taxability of settlement depends on the kind of injury. Following is a clearer overview of taxability for each type of injury.

Loss of the WagesThe salary you receive is taxable. Similarly, the settlement money you receive for the loss of wages is also taxable. The settlement, in this case, is taxable because it is intended to settle or compensate for the salary that you would have received, had the auto accident not happened. Sometimes, the jury awards the victim for compensating the loss of the wages, irrespective of the settlement. The jury award is also taxable, if it is provided to compensate for the loss of the wages.

Pain and SufferingPain and suffering is listed under the category of emotional distress. Pain and suffering is complex and confusing in a way that it blends with the physical damage. However, the medical settlement for physical damage is based on your medical bills, which include visible or invisible injuries. Pain and suffering is not reported separately. However, it is broken down separately for the settlement. For example, a person breaks an arm in auto accident. The physical pain will be compensated with medical settlement. The inability to move around without support will be compensated with suffering settlement.

Emotional suffering is the distress and trauma caused by the physical inability. It is compensated with emotional suffering settlement. The money, which the person receives for physical suffering is non-taxable according to the IRS. However, the money, received for emotional distress, is taxable.

Medical CostsIRS provides lenient laws for medical bills. The compensation for medical bills is non-taxable in a majority of the cases of auto accidents. However, if the compensated person has already received reimbursements for unaffordable medical expenses in the previous tax return, then the reimbursement is taxable.

Property/Vehicle DamageThe rule is simple. When you pay for repairing your car or any other property, you don’t pay the taxes. Similarly, the compensation you receive for vehicle/property damage is non-taxable.

Punitive DamageAccording to the IRS, punitive damages are taxable, irrespective of the physical damage or the damage caused by the wrongful driving or bad behavior of the opponent.

By understanding the complexity of taxability of the auto accidents, you can apply for the justified settlements. However, as mentioned earlier, taxes greatly depend on the situations. Therefore, you would need a professional attorney to apply for the settlement.

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